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This section of the budget discusses the major sources of budget receipts for 1977 to 1980 and the legislative proposals affecting them. Budget receipts by source are shown in detail in table 10 of Part 9. The economic assumptions underlying the estimates are presented in Part 3 together with estimates of receipts for 1981–1983 and estimates of receipts at high employment. Part 6 contains an analysis of the difference between receipts for 1977 and the budget estimates for 1977 made 2 years ago.
Budget receipts in 1979 are estimated to be $439.6 billion, an increase of $39.2 billion from the $400.4 billion in 1978. Receipts in 1980 are estimated at $505.4 billion. These estimates reflect the effects of: • proposed tax reductions generally effective October 1, 1978, and tax reforms, generally effective January 1, 1979; • proposed increases in energy excise taxes, but with largely offsetting refunds; and • increases in social security payroll taxes resulting both from previous legislation and from the recently enacted Social Security Amendments of 1977.
Composition of budget receipts.-The Federal tax system relies predominantly on income and payroll taxes. In 1979, under the proposals in this budget: • Income taxes paid by individuals and corporations are estimated to be $190 billion and $62 billion, respectively. Combined, these sources account for 57% of estimated total budget receipts. • Social insurance taxes and contributions—composed largely of payroll taxes levied on wages and salaries, and most of which are paid equally by employers and employees—will produce an estimated $142 billion, 32% of the total. • Excise taxes imposed on selected commodities, services, and activities are expected to provide $25 billion, 6% of the total. • Other taxes and miscellaneous receipts are estimated to be $20 billion, 4% of the total. 48
Individual and corporation income taxes.- In the last 3 years, four major laws have changed individual and corporation income taxes. The first was the Tax Reduction Act of 1975 (Public Law 94-12), enacted March 29, 1975. It provided a partial rebate of calendar year 1974 individual income tax liabilities, a number of temporary reductions in individual and corporation income tax liabilities (generally applicable to calendar year 1975), and a few permanent changes in the tax structure. The most notable of the permanent changes were limits on percentage depletion for oil and gas producers and revisions in the tax treatment of certain foreign income. Because the law was not enacted until late March, withholding schedules were not changed to reflect the reduction in individual income tax liabilities until May 1, 1975. Individual income tax withholding rates were reduced by enough to effect the full year's reduction in liability during the 8 months remaining in the calendar year; the withholding rate reductions, therefore, had to be greater than if they had begun on January 1.
The second major tax statute was the Revenue Adjustment Act of 1975 (Public Law 94–164), which was enacted on December 23, 1975. This act, in effect, provided tax reductions for the first 6 months of calendar year 1976. For corporations, the act extended the rate reductions that were enacted in the Tax Reduction Act of 1975. For individuals, however, a larger reduction was enacted in order to avoid increasing the withholding rates that applied during the last 8 months of calendar year 1975.
The third major tax act affecting individual and corporation income taxes (as well as estate and gift taxes and, to a very small degree, excise taxes) was the Tax Reform Act of 1976 (Public Law 94–455), enacted October 4, 1976.' This act extended some temporary provisions
1 The Congress also enacted interim legislation that extended individual income tax withholding rates. These rates were scheduled to increase July 1, 1976, and were extended because the Congress had not completed action on the substantive tax law changes that were later incorporated into the Tax Reform Act of 1976.
scheduled to expire and made others permanent. It also enacted a number of major tax reforms and other changes, including: provisions limiting investment by noncorporate taxpayers in tax shelter devices; increasing the minimum tax on individuals and corporations; imposing new limitations on taxes deferred through Domestic International Sales Corporations (DISC's); and providing a comprehensive revision of estate and gift taxes. The Tax Reduction and Simplification Act of 1977 (Public Law No. 95–30) was enacted May 23, 1977. This act extended for 1 year the temporary provisions of the Tax Reform Act that were scheduled to expire December 31, 1977. In addition, it enacted two major tax changes and a number of other reforms and simplifications. The temporary provisions of the previous act that were extended for 1 year, to December 31, 1978, are: • The general tax credit of $35 per exemption or 2% of the taxpayer's taxable income up to $9,000, whichever is larger. • The earned income credit, for families with dependents, equal to 10% of earned income subject to a maximum of $400. The maximum credit is phased down to zero between adjusted gross income (or earned income, if greater) of $4,000 and $8,000. • Corporate rate reductions, from 22% to 20% on the first $25,000 of income and from 48% to 22% on the second $25,000. One major change enacted in this legislation was simplification of the structure of standard deductions. Previously, a taxpayer who did not itemize deductions could take either a minimum standard deduction (low-income allowance) of $2,100 for a joint return and $1,700 for a single person or a percentage standard deduction of 16% of adjusted gross income with a maximum of $2,800 for a joint return or $2,400 for a single person. The 1977 act replaced this two-part standard deduction with a flat standard deduction of $3,200 for taxpayers filing a joint return and $2,200 for a single person. This permanent change in liabilities was effective beginning in calendar year 1977, but lower withholding rates were not effective until June 1, 1977, following enactment in May. Unlike the Tax Reduction Act of 1975, withholding rates were not adjusted to effect the full $4 billion reduction in calendar year 1977 liabilities during the remaining 7 months of the year. As a result, refunds in the spring of 1978 will be about $2.1 billion higher than they would have been if withholding rates had been lowered January 1, 1977. The other major change in the 1977 act was a temporary jobs tax credit. For calendar years 1977 and 1978, employers whose employment has increased by more than 2% over the previous year will generally be able to claim a tax credit of $2,100 per additional employee. The aggregate credit is limited to $100,000 per employer per year. Wages offset by the credit may not be treated as deductible business expenses.